Gundlach Likes Gold Miners, and He’s Not Alone

By Sam Mamudi

Reuters

Only for the brave

While gold itself is having a rough time recently, at least it’s still up 9% this year. The same can’t be said for gold-miner stocks, which have been moving in the opposite direction — the Market Vectors ETF Trust Gold Miners (GDX) is down 8% this year.

It’s a trend we at Barron’s noticed earlier this month. While the sector carries risks, there is a notion that it’s getting too cheap to ignore, as Michael Kahn wrote:

Out of destruction comes opportunity. And for investors with enough nerve to handle the volatility, gold-mining stocks make sense.

He’s not alone in his thinking. In a profile of fund manager Jeffrey Gundlach today, Bloomberg reports that the noted bond buyer is upping his holdings of natural-gas producers and, yes, gold miners. Gundlach’s argument? They’re cheap, he says.

Earlier this week, I spoke with money manager David Steinberg and he told me much the same thing. Steinberg, a deep value investor, named Barrick Gold Corp. (ABX) and Kinross Gold Corp. (KGC) as two gold-mining stocks that offer value. Barrick is down 37% in the past year while Kinross has fallen 28%.

But even if they’re cheap, that doesn’t make them a slam-dunk investment, as Kahn noted:

Nothing is guaranteed and it is always possible that shares of miners will continue to fall. All we can do is line up the evidence we have and right now it still favors the long-term bullish case for the miner.

The are plenty of problems for gold-miners: little free cash-flow, increasingly expensive extraction costs and working in some of the world’s most unstable regions, to name a few. That’s not enough to put off the likes of Gundlach and Steinberg, but there’s a reason why few others are jumping in.

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The blog is written by Ben Levisohn, a former stock trader who has covered financial markets for the Wall Street Journal, Bloomberg and BusinessWeek.